The End of Contingency Contracts?

As one who has helped negotiate and been part of a range of sourcing contingency contracts based on savings, I've got some experience at understanding the pros and cons of these approaches. But nothing prepared me for a conversation that I had last week with a services provider that was about to feel the brunt of a customer bankruptcy. This provider had saved a company millions of dollars and had agreed to a contingency payout schedule based on this savings. But when the customer went belly-up, not only did they forfeit the expected payouts, they were also potentially responsible for refunding all of the recent payments that had been made to them. That's because bankruptcy laws can allow the courts to reclaim payables made in the final months prior to a bankruptcy filing to redistribute among other debt and lien holders. So not only is this services provider in the process of writing off future revenue -- it's also faced with the prospect of giving back money that was rightly paid.

In this environment, it would be foolish for consultants and outsourcers to pursue contingency agreements with all but the most credit worthy Fortune 500 customers. It might even make sense -- especially considering the rise in bankruptcies -- to renegotiate existing payout agreements at a discount in exchange for forward payment. Even though I'm no longer in the sourcing consulting business, I'd happily take a margin hit in exchange for reducing the chance of not getting paid at all -- and having to cut a check back to a client that saved millions as a result of our efforts.